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AMZN Priced for Perfection: Should Investors Worry?

Written by: Richard Saintvilus04/27/12 - 11:20 AM EDT

Tickers in this article:
AMZN

NEW YORK (TheStreet) -- While I have never believed that there is such a thing as a "perfect stock," I have always remained cautious at stocks that I believed are "priced for perfection."

Investors are often quick to throw valuation metrics out of corporate windows in favor of "zeal," a quality that flies in and attaches to names such as Chipotle(CMG) or Salesforce.com(CRM) and to a lesser extent virtualization king VMware(VMW) . These are examples, of stocks that by virtue of their enormous trading multiples that fit the description of "priced for perfection."

As great as it is for these companies to have earned such favor and high praise from Wall Street resulting in high flying stock prices, one misstep can be severe -- if not entirely catastrophic. After all, one cannot spell "perfect" without P/E and several of these names sport ratios that offend value investors -- myself included. As fundamentally sound as e-commerce giant Amazon(AMZN) continues to prove that it is, I have recently decided that by virtue of its P/E of 143 it now merits a ranking among the "perfect." The question is, should there now be cause for concern?

Perfect Problems

Amazon is without question one of the best tech stories today. It is a wonderful company with one of the top three visionary CEOs in Jeff Bezos. But the stock is expensive -- there is no way to spin this. I have never been a fan to the so-called "premium pricing." I will concede that it has never served as an impediment to growth stocks like Amazon. The question for "perfect stocks" has always involved the challenges with growing into the valuation.

In its Q4 report, the concern for Amazon seems to be its growing expenses and what appear to be shrinking margins. The company has always demonstrated a commitment to tackle new markets and seek growth opportunities. To that end, it had taken on facilities expansion in an effort to provide broader ranges of entertainment delivered over its new Kindle Fire tablet as well as the launching of its movie-streaming Prime service to compete with Netflix(NFLX) .

The stock (then) took a pounding on the announcement. Wall Street wants growth and lots of it. But it seems that many analysts as well as investors do not appreciate the fact that such tremendous growth comes at tremendous cost. Leading into the company's Q1 earnings report, I was eager to see if Amazon can help avert my concerns of perfection.

The Perfect Quarter

On Thursday, the company reported Q1 earnings results that blew away analysts' estimates. The company reported net sales for the quarter of $13.2 billion -- representing an increase of 34% from the $10 billion that it reported a year ago. Consensus expectations for revenue were $12.9 billion. The company said its rise in sales was driven largely by increased demand of the Kindle Fire. Amazon also reported operating income of $192 million compared with $322 million a year ago.